Trading at a fraction of a penny

• existing home sales plunged 16% M/M; however prices stabilized, of which first-time buyers (urged on my housing stimulus) were a major factor; muted reception
• FOMC meets Tuesday (1st of 2 day meeting - announcement Wed 2:15); 8 times a year. It would be insane to see a rate hike until QE is completed
• Greek issued 11bn of debt at 6.2%; CDS at 329bps. Good idea for the buy and hold investor
• Obama's crackdown on banks is simply a buying opportunity
• Exchanges looking to quote in 1/10 of a cent in order to compete with dark pools

Prop trading isn't a big deal

• Benanke vote questionable; missing key Democratic support. Market would increase inflation expectations if he's not reelected
• Obama: "American people will not be served by a financial system comprised of just a few massive firms". Planning to ban proprietary trading, divest internal hedge funds. Banks would more prop trading into asset management
• Top 4 lenders hold 35% of deposits; up from 5% in 1998
• Flow business: bank as a counter party to clients
• Prop trading: 1.4% of BNP Paribas, 4.3% at DB, CS
• UC Rusal finally priced on HK Exchange
• Inconsistency: want banks to lend, but also reduce risk

Obama Regulatory Changes

2009 in review

• Best performing hedge fund strategy last year was convertible arbitrage: find anomalies between bond price and equity; short sellers preformed the worst
• Emerging markets gained 37.9% for 2009

Platinum ETF/ETN

• ETFs: depend on arbitrage mechanisms to guarantee its price tracks with NAV; during market turbulence spreads can widen
• ETN: unsecured debt; backed only by credit of issuer. has a maturity date. pays the amount specified by the tracking index at maturity less fees; can be shorted. Tax efficient, considered as a prepaid contract (e.g. forward)
• PGM US Equity traded at premium to tracking index, as the ETF didn't have a mandate to issue more shares, investors bid up; Difficult to execute because of the high borrow cost of the ETF

News

• SP500-ex financials expected to post 8% in Q4
• Historically: stock market has delivered higher returns with lower volatility when US unemployment was high
• BRICs contributed to half of global growth between 2000-2008.
• reconfirm Bernanke

Obama Regulatory Changes

• Mr Obama called for banks to be banned from running their own trading desks and “owning, investing in or sponsoring” hedge funds and private equity groups.
• Will take 3-5 years to debate, modify legislation
• Banks can hold no more than 10% of deposits (must lend!)
• Paul Volcker (chairman of the economy recovery advisory board)(80s, former Fed reserve chairman - before Greenspan, inflation was ridiculous, put fed funds rate to 15%, unemployment soared, inflation gone)
• Tim Geithner: treasury secretary
• TALF: term asset-backed securities loan facilities (ending Mar 31st): Fed lends cheap money to investors (hedge funds) to buy asset backed securities

Greece

All about the Fed

• Fed purchased CDO assets from AIG during the crisis, so that CDS contracts on the CDO could be terminated. The Fed made the controversial decision to pay the CDS contracts in full, as a way of injecting money into the banking system, and criticized as a 'back door bail out'
• Those assets have increased $29.6bn to $45bn; a paper profit difficult to realize since the CDO market is still illiquid

News

• I really can't bring myself to care about Cadbury
• Citi reports 7.6bn loss; excluding 1-time items, 1.6bn loss in 2009, 27.7bn loss in 2008; however 70% of revenue outside the US; most saw this as a buying opportunity, shares went up 2% on the news

Greece!

• Promises to cut deficit of 12.7% GDP to 3%; won't happen
• Falsified financial figures for years
• Doesn't have monetary tools (policy, currency depreciation) to combat deficit
• Unit labor costs (along with Ireland, Italy, Spain) up 23% compared to Germany, making them uncompetitive
• Borrowing much more as a % GDP than Ireland, Spain
• Could default: removed from EU, would make the weaker remaining members much more vulnerable; significant political upheval
• Could bail out: fast-track merging the EU into a more cohesive group; easier to dictate future policy.

Risk On

Risk On trade

• "risk on" trade: bought stocks, sold dollars for other other currencies. "risk off": sell stocks, buy back dollars
• when equities go up, a sign of investors taking on risk, dollar, yen go down
• carry trade high yield currencies: Australian, New Zealand dollar

General news

• since mid-december, euro has fallen
• 2009: broad brush investment theme; 2010: selecting bets more carefully
• American Airlines, Delta competing to partner with JAL (just cut 1/3 of its workforce); could be the largest bankruptcy outside the financial sector
• Possible Paris bond trading exchange in the works; set for next year
• Resurgence in European high yield (~10%, 20% yield at peak) paper; 30-40% growth compared to 15% investment grade
• Platinum: first physical platinum, palladium market
• Swiss Re transferred $300m to Berkshire
• Banks expected to be less profitable as quantitative easing ends, decreasing trading profits and available leverage
• Greek 10-yr +270bps to the Bund
• Will the European union allow the euro to suffer to help Greece, or play hard and allow Greece to suffer?

CDS premium and default probabilities

• Use of a CDS for limit exposure to a government is becoming more popular; new regulations have created the demand

• People's Bank of China raised reserve requirements 0.5% (sooner than expected) - implies that interest rates will rise
• Cheveron missed earnings
• Greece under-estimated / under-reported debt as % GDP; prime minister admits corruption problems
• Fed paid record $46.1bn to the Treasury in 2009; net income of $52.1bn - also a record
• Fed has about $2bn on its balance sheet it needs to unload; could loose value as it's sold
• Economies that serve China: Taiwan (industrials), Brazil (commodities)
• Largest iron ore player: Vale of Brazil, Tio Tinto, BHP Billiton
• Short sell on Chinese exchanges

FT: Myth of BRICs. Yes.

The story at home

• Business, governments looking to issue debt while rates are still low; US bond market had its second busiest day on record. At the end, it's a belief that the market will recover and interest rates will rise
• Dollar moving lower (non-farm payroll data), 1.45 to the euro
• *Earnings Season!* Alcoa reported today, earned 0.01; expected 0.06
• Intel, JP Morgan report Thurs, Fri. Expecting earnings growth of 184% y/y
• Consumer discretionary not expected to rebound as significantly

Myth of BRICs (FT: Tasker, Peter 11-Jan)

• emerging market IPOs have been at double cash value of developed market IPOs
• NO CORRELATION between GDP growth and stock market returns. Countries with high growth potential are not good investment opportunities unless valuations are low
• Macro: emerging markets have under utilized savings and human resources; no motivation to raise returns on existing capital when you have easy access to additional capital
• China bubble: apartment prices 15-20x salary; 50% GDP is fixed-asset investment
• Shanghai index has halved; still too rich

Figuring out the macroeconomics

• Arnold's last budget needs 6.9bn from the fed for a 19.9bn deficit; previously printed 3bn of IOUs (15-Jul-09), at 3.75% - specifies 8.5bn of cuts; no new taxes
• New UK law: 50% tax on earnings over £150,000; companies are accelerating the payment of dividends
• Chinese exports rose (17.7%) for the first time in 14 months; brings new pressure to appreciate currency (year on year comparisons inflated due to previously low numbers). After consecutively good numbers, will most likely issue an appreciation
• Fri: 85,000 jobs lost; Eurozone hit 10% unemployment; S&P ended up 0.3%
• Dec Fed: moderate growth, tame inflation; contrasted to more bullish private sector. Most worried about commercial real estate, reluctance of companies to start hiring
• Fed has already purchased 1,700bn bonds; 10-yr treasury up to 3.9 from 3.2 as a reflection of Fed stopping purchasing; For 2010, the market will need to find a place for 2,000bn of new issuance
• Most likely won't end in March; if the Fed has to buy more it will make the eventual unraveling more troublesome

• US Yield curve is the steepest ever. Gap between 10 Yr and 2 Yr 286 points. Usually a signal to go long equity
• Fed signaled not expecting changes for 2010; suggesting low growth, continued unemployment
• Think about the bond dynamics - massive purchase of short term securities